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Generalists and Specialists in the Credit Market

63 Pages Posted: 21 Mar 2016 Last revised: 1 Sep 2016

Daniel Fricke

University College London; London School of Economics & Political Science (LSE) - Systemic Risk Centre; University of Oxford - Said Business School

Tarik Roukny

Massachusetts Institute of Technology (MIT)

Date Written: March 21, 2016

Abstract

In this paper, we propose a method to analyze the structure of the credit market. Using historical data from Japan, we explore banks’ lending patterns to the real economy. We find that generalist banks (with diversified lending) and specialist banks (with focused lending) coexist, and tend to stick to their strategies over time. Similarly, we also document the coexistence of generalist and specialist industries (based on their borrowing patterns). The observed interaction patterns in the credit market indicate a strong overlap in banks’ loan portfolios, mainly due to specialist banks focusing their investments on the very same generalist industries. A stylized model matches these patterns and allows us to identify economically meaningful sets of generalist banks/industries. Lastly, we find that generalist banks are not necessarily less vulnerable to shocks compared to specialists. In fact, we show that high leverage levels can undo the benefits of diversification. Hence, banks’ position in the credit network can be informative about their riskiness from a systemic perspective.

Keywords: networks, bank lending, portfolio theory, fire sales, contagion, diversification, systemic risk

JEL Classification: G11, G20, G21, G28, G32

Suggested Citation

Fricke, Daniel and Roukny, Tarik, Generalists and Specialists in the Credit Market (March 21, 2016). Saïd Business School WP 2016-11; Paris December 2016 Finance Meeting EUROFIDAI - AFFI. Available at SSRN: https://ssrn.com/abstract=2752413

Daniel Fricke

University College London ( email )

Gower Street
London, WC1E 6BT
United Kingdom

London School of Economics & Political Science (LSE) - Systemic Risk Centre

Houghton St, London WC2A 2AE, United Kingdom
London

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain

Tarik Roukny (Contact Author)

Massachusetts Institute of Technology (MIT) ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

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